Through the Procedures of Corporate Democracy...

-- By AlexAsen - 08 Mar 2012

The Problem

In 2010, Justice Kennedy, writing for the majority in Citizens United, announced that section 203 of the McCain-Feingold Campaign Finance Reform Act violated the First Amendment and that, among other things, corporations are now free to contribute unlimited amounts of money to political campaigns. Citizens United v. Fed. Election Comm'n, 130 S. Ct. 876, 883 (2010) ("Political speech is indispensable to decisionmaking in a democracy, and this is no less true because the speech comes from a corporation." (internal citation omitted)).

Kennedy conceded, however, that government has a legitimate "interest in providing the electorate with information about the sources of election-related spending." Id. at 914. In response, Congressional Democrats tried to pass the DISCLOSE Act, but failed. The FEC has been silent and the SEC is considering the issue, but is preoccupied with Dodd-Frank. See, generally, Could the SEC please give democracy a hand.

The Pitch

Waiting for Washington to get its act together is an option, but it just so happens that we are all part of one of the few institutions in the world where people are both interested in securities law and have a bit of free time. Kennedy enthusiastically cited Bellotti: "Ultimately shareholders may decide, through the procedures of corporate democracy, whether their corporation should engage in debate on public issues." First Nat. Bank of Boston v. Bellotti, 435 U.S. 765, 794 (1978). The suggestion that we must master "corporate democracy" in order to take control of American democracy is absurd, but this is the kind of absurdity designed for law students.

Let's consider promoting some corporate transparency. An ultimate goal of convincing shareholders to apply pressure to limit political contributions, perhaps the most obvious definition of "corporate democracy," will likely fail. Shareholders have consistently declined to support political spending reporting requirements, although several dozens have been proposed. See Political Spending Proposal Defeated at Home Depot. Luckily, a majority shareholder vote is not required for actions in the Delaware Court of Chancery. One could use this tool of corporate democracy to pry free information. When armed with the proper information, consumers, unlike the majority of shareholders, have occasionally showed a willingness to pressure corporations to curtail political spending. See Target CEO Apologizes For Company's Support of Tom Emmer.

The Hammer

Section 220 of the Delaware General Corporation Law (DGCL) provides that "[a]ny stockholder . . . shall . . . have the right . . . to inspect for any proper purpose . . . . [t]he corporation's stock . . . books and records." 8 Del. C. § 220(b). The statute does not require that the stockholder own a minimum number of shares, one share will suffice. 8 Del. C. § 220(a). Furthermore, if "activities that occurred before the purchase date are reasonably related to the stockholder's interest as a stockholder, then the stockholder should be given access to records necessary to an understanding of those activities." Saito v. McKesson HBOC, Inc., 806 A.2d 113, 117 (Del. 2002) (internal citations omitted).

The statute defines "proper purpose" as "a purpose reasonably related to such person's interest as a stockholder." 8 Del C. § 220(b). The propriety of a stockholder's purpose depends on the "facts in each case." CM & M Group, Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982). In 1971, the Minnesota Supreme Court "held that shareholders have no right to inspect their corporation's stockholder list unless their ultimate aim is the enhancement of the economic value of the corporation . . . . [h]owever, this result was disapproved by the Delaware Supreme Court. Food and Allied Service Trades Dept., Afl-Cio v. Wal-Mart Stores, Inc., 18 Del. J. Corp. L. 651, 657 (1992). Under Section 220, Delaware courts have repeatedly allowed stockholders access to shareholder lists in order to solicit proxies on social and political issues. Id. Moreover, "once a proper purpose has been established, any secondary purpose or ulterior motive of the stockholder becomes irrelevant." CM & M Group, 453 A.2d at 792.

Unlike the circumstance in the available favorable case law, we would not be asking for a list of shareholders to contact, but a list of political contributions. Our challenge would be to successfully articulate our purpose for seeking such a list. It "is well established that investigation of mismanagement is a proper purpose for a Section 220 books and records inspection." Security First Corp. v. U.S. Die Casting and Dev. Co., 687 A.2d 563, 567 (Del. 1997). However, stockholders "must present some evidence to suggest a credible basis from which a court can infer that mismanagement, waste or wrongdoing may have occurred." Seinfeld v. Verizon Communications, Inc., 909 A.2d 117, 118 (Del. 2006) (internal citations omitted). The "[m]ere curiosity or a desire for a fishing expedition will not suffice." Security First, 687 A.2d at 568.

Considering this standard, I wonder if evidence of strong political leanings of corporate officers combined with evidence of past contributions in support of those leanings would suffice as a "credible basis" for an inspection. See Seinfeld, 909 A.2d at 118. On the other hand, without focusing on the self-interest of O&D, there is some empirical evidence that political contributions generally negatively affect corporate profits. After reviewing data from 1110 firms, Economist Dr. Michael Hadani reported to the SEC that "PAC expenditures have a statistically significant negative affect on firms' market value, both when examining their year to year PAC expenditures and also when examining their cumulative, 11 years, PAC expenditures." See Could the SEC please give democracy a hand. While it would be nice to get a ruling that evidence of political spending is per se sufficient to establish a credible basis for inspection, finding press reports like the Target one, is likely a better route. One can make a pretty strong case for potential mismanagement when a CEO is forced to apologize in the face of a threatened boycott.

Anyone know any good companies to look into?